The economics of the NYT paywall

By Felix Salmon

January 20, 2010

Preston Austin has managed to squeeze the economics of a NYT-style paywall into one tweet, but it's compressed, so let me expand it into slightly more than 140 characters.
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Preston Austin has managed to squeeze the economics of a NYT-style paywall into one tweet, but it’s compressed, so let me expand it into slightly more than 140 characters.

The way that it seems the NYT paywall is going to work, visitors to nytimes.com will have a free allowance of n articles per month. To read the n+1th article, they will have to pay a subscription fee F. After that, they can read as many articles as they like for the rest of the month.

If a visitor to nytimes.com normally reads N articles per month, then the key number in their mind will be N-n. If reading that number of articles is worth more to them than F, they’ll pay the fee. If on the other hand N-n is small, or perceived value-per-article is small, then they won’t pay. Specifically, if the average value to the reader of any given article is v, then they’ll pay the fee when v(N-n)>F.

It does get a bit more complicated than this. For one thing, there’s the day-of-the-month issue. If you run into the paywall towards the end of the month, that’s a clear signal from nytimes.com that you’re not a particularly heavy user and therefore not the kind of person who’s likely to get a lot of value out of subscribing. Or, to put it another way, it’s a signal that this month at least, N-n is going to be low. In general, the NYT is unlikely to make much money from people paying the full fee F to read just a few extra articles at the end of the month.

On the other hand, as Jim Surowiecki says, consumers tend to like bundling. From a purely economic perspective, there’s no point in subscribing to nytimes.com before you reach your limit of n free articles. But from a more behavioral perspective, it takes a weight off your mind when you know that you’re a subscriber: you don’t have a little voice in the back of your head asking “are you sure you need to read that?” before you click on any link to nytimes.com. In general, the mere existence of the paywall will make life happier for subscribers than non-subscribers, who will always feel somewhat constrained in how they use the site. For some people, the peace of mind associated with being a subscriber will in and of itself be worth F, even if they don’t read n articles per month.

More generally, it’s pretty clear that v is higher for subscribers than it is for non-subscribers. The value of reading any given article lies not only in the content of that article, but also in the ability to read the non-article components of the web page, to be able to follow links from that page to related or unrelated stories on the rest of the site, and in general to feel at home while visiting the website as a whole.

By building a metered system, the executives have installed a dial on the huge, heaving content machine of The New York Times. Access can be gradually ramped up or down depending on macro trends in the market.

The implication here is that when advertising is strong, access can be ramped up, and when advertising is weak, it can be restricted, in an attempt to maximize subscription revenues.

I suspect that the main dial here is going to be n rather than F: it’ll be much easier to change the number of articles that people can read for free than it will be to change the price of a monthly or annual subscription. In a way, the best of all possible worlds, from a revenue perspective, would be to launch the new system with great fanfare and a low n, as well as a low annual-to-monthly subscription ratio. Then, when the low-hanging fruit has been picked and you’ve locked in a decent number of subscribers, quietly dial n back to a very high number, so as to minimize the pain caused to non-subscribers, and maximize total advertising revenue.

On the other hand, the experience of the FT suggests that there’s a strong temptation to go the other way: it has been dialing down n to a very low level, as it becomes increasingly addicted to online subscription revenue. It’s a bit like the airline fallacy that charging to check bags increases revenues: it doesn’t, but executives, especially at public companies, have a tendency to look at short-term revenue line-items rather than the bigger picture.

Finally, as John Gapper notes, there’s another calculation going on here: at the margin, implementing an online paywall is a good way of preventing print subscribers from cancelling their subscriptions on the grounds that they can get the same content online for free. (Print subscribers to the NYT will get online access for free, rather than having to pay extra for that, as they do at the FT.) Rather than saving the cost of a print subscription, P, they will now only save P-F. That’s an argument for a high F, of course — but the higher you peg F, the harder it becomes to convert the millions of visitors to your website into paid subscribers.

The NYT is therefore going to have to work out how to maximize revenues in a highly complex and dynamic system: the level of F which maximizes online subscription revenues won’t be the same level of F which maximizes print subscription revenues. And the NYT will also have to think long and hard about how transparent it wants to be about the level of n.

My prediction is that when the NYT paywall arrives, n will be in the 15-20 range, and F will be set somewhere around $15/month and $99/year. What that will do for the NYT’s total revenues, however, I have no idea.